James E. Caldwell & Co. v. Comm'r of Internal Revenue

• Decision Date: 30 June 1955
• Docket Number: Docket No. 37967.
• Citation: 24 T.C. 597
• Parties: JAMES E. CALDWELL & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 597

JAMES E. CALDWELL & COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 37967.

Tax Court of the United States.

Filed June 30, 1955.

David M. Keeble, Esq., for the petitioner.

Frederick T. Carney, Esq., for the respondent.

1. Upon the incorporation of petitioner, its principal officer conveyed to it approximately 1,100 acres of real estate for shares of petitioner's stock; and such shares were then transferred to trusts for the benefit of the officer's family. Thereafter, a judgment creditor of the officer, finding him to be insolvent, filed a suit in equity to partially annul and rescind the conveyances, or in the alternative to recover the stock. Such suit was compromised and settled upon payment by petitioner to the officer's creditor of $50,000 plus $400.65 court costs. Held, that petitioner did not, by reason of the compromise payment made to its officer's creditor, acquire a greater cost basis for the real estate than that allowable with respect to a complete and valid conveyance of its officer's entire property interest. Held, further, that the amount of $172.50 which petitioner paid for a title guaranty policy used to borrow money for the settlement, may likewise not be added to its basis for the real estate.

2. A judgment was entered against petitioner, its officers, and others, in an action filed by the receiver of another corporation, in which it was determined that the several defendants had, through conspiracy and fraud, ‘milked’ and dissipated the assets of such other corporation for the benefit of persons other than petitioner. Petitioner paid $123,116.81 toward satisfaction of such judgment. Held, that petitioner is not entitled to deduct said amount from its gross income, either as a loss or as an ordinary and necessary expense of its business. Held, further, that $1,500 attorney's fees incurred in settling a dispute among the defendants as to the amount each should pay in satisfaction of the judgment, are likewise not deductible by petitioner as an ordinary and necessary expense of its business.

3. Petitioner sold shares of stock of another corporation, which it had acquired by gift. There are no records available from which a determination can be made, either as to the basis of the shares in the hands of petitioner's donor, or as to the identity of the last preceding owner by whom the shares were not acquired by gift, or as to the fair market value of the shares on the unknown date when such preceding owner acquired them. Held, that in such circumstance, the Commissioner did not err in attributing a zero basis to the shares, for the purpose of computing petitioner's gain from the sale.

This proceeding involves deficiencies in income tax determined against the petitioner for the years 1947, 1948, 1949, and 1950, inclusive, in the amounts of $8,621.73, $2,301.28, $14,706.14, and $8,159.01, respectively. Not all of the adjustments set forth in the notice of deficiency have been contested. The issues here presented are:

(1) Is petitioner entitled to use as its basis for computing gain on the sale of certain real estate which it acquired from its principal officer for shares of its stock, not only the amount allowed with respect of the officer's conveyance as a complete and valid transfer of his entire property interest, but also the amount of $50,400.65, which petitioner paid to a judgment creditor of said officer in compromise of a suit either to annul or rescind the conveyance or to recover the stock which had been issued for the property? Also, may petitioner further add to its basis for said real estate the amount of $172.50 which it paid for a guaranty title policy used in borrowing cash for the settlement?

(2) Is petitioner entitled to deduct from its gross income, either as a loss or as ordinary and necessary expense of its business, the amount of $123,116.81 which it paid toward satisfaction of a judgment entered against it, its officers, and certain other defendants, for engaging in a fraudulent conspiracy whereby assets of another corporation were ‘milked’ and dissipated for the benefit of persons other than the petitioner? Also, (a) is petitioner likewise entitled to deduct as an ordinary and necessary business expense, $1,500 attorney's fees incurred in settling a dispute among the defendants as to the amount each should contribute toward payment of said judgment, and (b) if both the above-mentioned amounts are deductible, would petitioner's resulting net loss for the year qualify as a net operating loss that would provide an operating loss carry-over for each of the 2 succeeding taxable years?

(3) Did the Commissioner err in using a zero basis to compute petitioner's gain from the sale of shares of stock of another corporation, where petitioner acquired the shares as a gift; and where there are no records available from which a determination can be made, either as to the basis of the shares in the hands of petitioner's donor, or as to the identity of the last preceding owner by whom the shares were not acquired by gift, or as to the fair market value of the shares on the unknown date when such preceding owner acquired them?

FINDINGS OF FACT.

Certain facts have been stipulated, and these are incorporated herein by reference.

The petitioner, James E. Caldwell & Company, is a Tennessee corporation with principal place of business in Nashville, Tennessee. It was incorporated on March 31, 1931. Its income tax returns for all years involved were filed with the collector of internal revenue for the district of Tennessee. In these returns, its business was variously stated to be ‘farming and investments,’ ‘farming and real estate,‘ and ‘farming.’

The petitioner corporation was authorized to issue a maximum of 30,000 shares of common stock, divided into 10,000 shares of class A common without par value, and 20,000 shares of class B common without par value. One James E. Caldwell (hereinafter sometimes called Caldwell) was, from the date of incorporation until his death in September 1944, the president and also a director of the company; and on his death he was succeeded in both capacities by his son Rogers Caldwell. Another son, Meredith Caldwell, was at all times vice president and a director; and a nephew, Winston Caldwell, was secretary-treasurer and a director. The other two directors of the corporation also were members of the Caldwell family.

At the first meeting of petitioner's board of directors on the date of incorporation, which was attended by all directors and at which Caldwell acted as chairman, a resolution was unanimously adopted whereby the corporation was authorized to purchase from Caldwell approximately 650 acres of land in Davidson County, Tennessee, together with a piece of business property in Nashville, all stated to have an aggregate value of $100,000; and to issue 10,000 shares of petitioner's class B stock in payment therefor. Conveyance of the properties to petitioner, for the consideration above mentioned, was effected by deed from Caldwell and his wife, executed and recorded on April 2, 1931. The deed recited that the conveyance was made subject to any liability that might accrue against Caldwell in consequence of certain court appearance bonds that he had executed on behalf of his son Rogers; but no other exception was mentioned. The deed further recited that Caldwell and his wife covenanted on behalf of themselves, their heirs, and representatives to warrant and defend the title against the lawful claims of all persons.

At another meeting of the petitioner's board of directors held on April 23, 1931, which was attended by Caldwell and the other abovementioned corporate officers, a resolution was adopted that authorized the corporation to purchase from Caldwell and his wife approximately 450 additional acres of real estate in Davidson County, known as Elysian Fields; and to issue 7,000 shares of petitioner's class B stock in payment therefor. This real estate, together with all tools, implements, machinery, furniture, fixtures, and livestock on the farms in Davidson County, was conveyed to petitioner for the consideration above mentioned, by deed of Caldwell and his wife, executed and recorded on April 23, 1931. This deed contained a covenant that Caldwell (without mention of his wife) was lawfully seized of said land and had a good right to convey the same, subject only to the terms and conditions of a mortgage theretofore made to the Nashville Trust Company.

The evidence in the instant case does not disclose the identity of petitioner's shareholders or the extent of their holdings, either before or immediately after the above-mentioned conveyances. It has been stipulated, however, that from and after December 1934 Caldwell held no legal or beneficial interest in any share of petitioner's stock of either class; that his son Rogers held 450 shares of class A and 1,000 shares of class B, as trustee for his brother Meredith; that Meredith held 1,000 shares of each class, as trustee for Rogers; and that, except for 1,730 shares of class A held individually by the wife of Meredith, all remaining shares of both classes were held by four members of the Caldwell family, as trustees of separate trusts for various members of the family, including grandchildren. Upon Caldwell's death in September 1944, he left no estate upon which execution could be levied.

On May 17, 1933, the First National Bank of St. Louis obtained a judgment in the Chancery Court at Nashville against Caldwell individually in the amount of $59,028.75. The judgment was in respect of a promissory note that evidenced a loan of $53,000 made to Caldwell in a prior year. After allowing a credit, on the judgment, of $566.80 for proceeds of collateral sold and applied, an execution was levied against Caldwell for the balance. Caldwell was insolvent, and the execution was returned nulla bona.

On August 3, 1938, said First National Bank of St....